Moody’s Investors Service kept its forecast for G-20 economic growth at just over 3% for this year and next, but warned of geopolitical risks, US protectionism and spillovers from global monetary tightening and China’s deleveraging measures.
The ratings agency said surprisingly strong data in the first half of the year prompted it to raise 2017 growth forecasts for China to 6.8% from 6.6%, for South Korea to 2.8% from 2.5%, and for Japan to 1.5% from 1.1%, Reuters reported.
"Overall growth (in South Korea) is supported by strong investment growth," Moody's said in its global macroeconomic outlook. It said South Korea's export momentum is showing signs of a slowdown, but it remains strong in value terms, up 19.5% year-on-year in July, reflecting South Korea's strong competitiveness and supporting overall growth.
It also expected the eurozone to accelerate in the rest of the year as suggested by robust sentiment indicators and revised upwards its forecasts for Germany, France and Italy.
The agency cut its forecast for the United States, however, to 2.2% in 2017 and 2.3% in 2018 from a previous 2.4% and 2.5%, respectively, citing its weaker-than-expected first half performance and expectations of more modest fiscal stimulus than previously assumed.
“The balance of risks is more favorable than it was at the beginning of the year,” Moody’s said. ”However, we note event risks related to conflicts in the Korean Peninsula, the South China Sea and the Middle East.”
“The test firing of missiles by North Korea, intensification of aggressive rhetoric on both sides, and a hardline stance from the (US President Donald) Trump administration have raised the risk of a conflict in the Korean Peninsula.”
"We believe that even the most benign outcome from an escalation of conflict with North Korea involving limited military action on the Korean peninsula would be detrimental to the economy of South Korea," Moody's said. "However, the South Korean government has the capacity to offset the negative shock with fiscal policy if this relatively benign scenario were to unfold."
Renewed Momentum
The agency also said there appeared to be "renewed momentum" to address bilateral trade issues that the Donald Trump administration deemed as unfair trade practices, which could hurt growth if wide-ranging measures were introduced.
For markets, it warned of risks of increased volatility due to historically elevated asset prices and broad investor expectations that interest rates would remain low even as the Federal Reserve and the European Central Bank said they were preparing to start rolling back unconventional stimulus.
While raising its China forecasts, the agency warned the economy has become increasingly reliant on new debt to foster growth. The agency downgraded China’s ratings by one notch to A1 in May, saying the financial strength of the economy would erode in coming years.
The agency revised its India forecast slightly lower to 7.1% as the government’s demonetization move last year led to several months of acute shortages for manufacturing and construction firms in particular, although it said it expected the impact to ease in coming months.
Trade Rises
G20 countries’ international merchandise trade increased for a fifth successive quarter during the three months to June, but the pace of growth slowed, data from the Organization for Economic Cooperation and Development showed Tuesday, Forextv reported.
On a seasonally adjusted basis and expressed in current US dollars, G20 export growth slowed to 1.4% in the second quarter from 3.4% in the first three months of the year, the Paris-based think tank said. The pace of growth in imports more than halved to 1.7% from 4.2%.
G20 merchandise trade remains around 10% lower than recent highs in 2014, the OECD said.
Significant divergences were witnessed across regions. Exports grew strongly in France, Germany, Italy, and Turkey. The pace of growth eased in the UK, the US, South Africa, South Korea, Japan, Mexico, Canada and China.
Saudi Arabia and Argentina reported massive declines in exports. Shipments also dropped in Australia, Brazil, India, Indonesia and Russia.
Imports growth improved strongly in France, Germany, Italy, Japan, Argentina, Australia, Russia, South Africa and Turkey. The reverse was witnessed in Canada, India, South Korea, Mexico, the UK and the US.
Currencies of all G20 economies except Argentina, Australia, Brazil and Canada, appreciated against the US dollar in the second quarter, the OECD said.
